Key Takeaways
- Over-time recognition applies only when one of the three IFRS 15.35 criteria is satisfied; otherwise revenue is recognised at a point in time.
- The entity must select a measure of progress (output or input method) that faithfully depicts the transfer of control to the customer.
- Construction, bespoke engineering, and long-term service contracts are the most common over-time arrangements in European mid-market audits.
- Choosing the wrong measure of progress can shift millions of euros of revenue between reporting periods.
What is Revenue Recognition over Time?
IFRS 15.35 sets out three criteria, any one of which triggers over-time recognition. First, the customer simultaneously receives and consumes the benefits as the entity performs (IFRS 15.35(a)), which is typical for recurring services such as cleaning or payroll processing. Second, the entity's performance creates or enhances an asset that the customer controls as it is created (IFRS 15.35(b)), which covers construction on customer-owned land. Third, the entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date (IFRS 15.35(c)). This third criterion catches bespoke manufacturing and made-to-order engineering work.
Once the entity concludes that over-time recognition applies, IFRS 15.39–45 requires it to select a single measure of progress. The two broad categories are output methods (units delivered, milestones reached, surveys of performance completed) and input methods (costs incurred relative to total expected costs). ISA 540.13(a) directs the auditor to evaluate whether the method selected is appropriate for the nature of the obligation. A cost-to-cost input method on a contract where material costs are front-loaded, for instance, will overstate progress unless the entity adjusts for uninstalled materials per IFRS 15.B19.
Worked example: Martens Bouw B.V.
Client: Dutch construction company, FY2025, revenue €55M, Dutch GAAP (RJ) reporter (applying IFRS 15-equivalent guidance under RJ 270). Martens signs a fixed-price contract on 1 February 2025 to build a distribution warehouse for a logistics firm. The contract price is €6.2M with estimated total costs of €4.96M, producing an expected margin of 20%.
Step 1 — Determine whether over-time recognition applies
The warehouse is built on the customer's land, so the customer controls the asset as it is constructed. The IFRS 15.35(b) criterion is met.
Step 2 — Select a measure of progress
Martens uses the cost-to-cost input method (costs incurred to date divided by total estimated costs). The contract has no significant uninstalled materials that would distort the input measure. Management considered an output method (milestone surveys) but concluded that cost-to-cost better reflects the continuous transfer of control given the even spread of construction activity across the project.
Step 3 — Measure progress at 31 December 2025
By year-end, Martens has incurred €3.10M of costs. Progress = €3.10M / €4.96M = 62.5%. Revenue recognised = €6.2M × 62.5% = €3.875M. Cost of sales recognised = €3.10M. Gross profit recognised = €0.775M.
Step 4 — Reassess the total cost estimate
During fieldwork, the auditor identifies that Martens received a subcontractor claim of €180,000 for additional groundwork. If accepted, total estimated costs rise to €5.14M, progress drops to 60.3%, and revenue falls to €3.74M (a reduction of €135,000). The auditor evaluates whether management's exclusion of the claim from the cost estimate is supportable under ISA 540.18.
The over-time calculation produces €3.875M of revenue at 62.5% completion, and the cost-to-cost method is defensible because construction activity is spread evenly, no uninstalled materials distort the measure, and the total cost estimate is current as at fieldwork completion (subject to resolution of the subcontractor claim).
Why it matters in practice
Teams frequently accept the entity's percentage-of-completion calculation without independently verifying the total estimated cost to complete. The cost-to-cost denominator is itself an estimate, and IFRS 15.B19 requires the entity to exclude costs that do not depict the transfer of goods or services. ISA 540.18 obliges the auditor to evaluate whether the inputs to the estimate are complete and accurate. Accepting a stale cost forecast from six months prior to year-end is a recurring inspection observation.
Practitioners on mid-market engagements sometimes apply over-time recognition to contracts that fail all three IFRS 15.35 criteria, particularly when the entity has historically used percentage-of-completion under the old IAS 11. The shift to IFRS 15 requires a fresh assessment for every contract. A standard product with minor customisation may not meet the "no alternative use" test in IFRS 15.35(c) if the entity could redirect it to another customer without significant rework.
Revenue recognition over time vs. at a point in time
| Dimension | Over time | At a point in time |
|---|---|---|
| Trigger | At least one IFRS 15.35 criterion met | No IFRS 15.35 criterion met |
| Recognition pattern | Progressive, using a measure of progress (output or input method) | Single point when control transfers per IFRS 15.38 indicators |
| Typical contracts | Construction on customer land, recurring services, bespoke manufacturing | Retail sales, standard equipment delivery, off-the-shelf software licences |
| Key audit judgment | Appropriateness of the measure of progress and reliability of the cost-to-complete estimate | Identification of the specific point at which control passes |
| Common error | Using stale cost estimates or failing to adjust for uninstalled materials | Recognising revenue at shipment when delivery terms place control transfer at the destination |
The distinction determines whether revenue appears gradually across periods or in a single period. For entities with long-term contracts (construction firms, engineering consultancies, IT implementation providers), the over-time model dominates the income statement. An incorrect conclusion at the IFRS 15.35 assessment stage cascades into every subsequent revenue figure.
Related terms
Frequently asked questions
How do I test whether a contract qualifies for over-time recognition?
Apply the three criteria in IFRS 15.35 sequentially: simultaneous receipt and consumption, customer-controlled asset, or no alternative use with enforceable payment right. If none is met, recognise at a point in time under IFRS 15.38. Document which criterion is satisfied and why the others were considered but not relied upon.
What happens if the measure of progress changes mid-contract?
IFRS 15.43 treats a change in the measure of progress as a change in accounting estimate under IAS 8. The entity applies the revised method prospectively from the date the change is made. The auditor evaluates whether the original method became inappropriate (for example, because significant uninstalled materials distorted the cost-to-cost ratio) and whether the new method better depicts the transfer of control.
Does over-time recognition apply to SaaS contracts?
It depends on the performance obligation structure. A SaaS arrangement where the customer simultaneously receives and consumes the hosting service as the entity performs satisfies IFRS 15.35(a). If the arrangement includes a distinct software licence that transfers at a point in time, that obligation is recognised separately. ISA 315.12(f) directs the auditor to understand the entity's revenue recognition policies before assessing risk.